Genting bets on new markets

GENTING group is eyeing casino opportunities in the highly regulated Japan or South Korea after building up a war chest of more than RM13bil to fund its expansion programme.

Genting Bhd has cash and cash equivalent of RM13.2bil as at Dec 31, 2011 (FY11) with RM11.9bil in bank balances and deposits while the balance of RM1.3bil in money market instruments. It is also able to generate more than RM500mil in free cash flow every year.

The group already has a sizeable stash of money to finance its expansion plans but clearly it is not resting on its laurels, for it has just announced plans for second issue of perpetual securities in Singapore to raise more funds.

Genting Singapore Plc, 52% owned by Genting Bhd, plans to sell S$500mil (US$397mil) in perpetual subordinated capital securities, a hybrid of bonds and equities, to mostly retail investors.

Ready and waiting: A visitor plays a slot machine at an amusement expo in Tokyo. Analysts say Japan is looking to liberalise its gaming industry and Genting group will be ready to bid for casino projects there should the opportunity arise. — Reuters

Just last month, Genting Singapore raised S$1.8bil from perpetual securities that was sold mainly to institutional and private-banking investors.

Genting Singapore chief financial officer Lee Shi Ruh says the proceeds from the perpetual subordinated capital securities issue would be used by Genting Singapore for the company's “expansion and ventures into new acquisitions or greenfield projects”.

“Should the opportunities arise, Japan and Korea are the options we can look at. The funds raised will put us in a strong position for potential overseas investments,” she says in an email reply to StarBizWeek.

When asked on the price of the S$1.8bil perpetuals solds to institutional investors that has been edging down, Lee says as with other types of securities, the price of the perpetual securities would fluctuate in short-term as interest rates move and market conditions change.

“However, investors of the perpetual securities tend to be long-term holders who value the stability of the interest income over the long-term”.

Underground walkway to the Resorts World casino in Singapore. Genting Singapore plans to sell perpetual securities worth S$500mil, its second in as many months. — Reuters

Analysts are not surprised that Genting was looking to put its money in Japan or South Korea as the gaming company had indicated its plans to grow its core business overseas despite a setback from its venture in Miami in January. Genting group has indicated its appetite for future casino development amounting to some S$5bil in the immediate to medium term.

“Japan is mulling over liberalising the casino industry for a while but regulatory risk with regards to casino licencing will continue to hinder Genting's plan to penetrate into the country,” an analyst, says, adding that Genting would be more cautious in its approach after the setback of its Miami venture when the state legislature pulled a vote to liberalise gambling activities in Florida.

He believes Genting group would be able to hold its own and bid for casino projects if it materialised in Japan or South Korea due to its track record in Singapore, Malaysia and the Philippines.

Some analysts, however, remain cautious on Genting's venture into east Asia due to the regulatory issues in Japan and South Korea.

“Yes, we are cautious but we are also optimistic with Genting's expansion plan into Japan and South Korea. Its a huge market to tap,” an analystsays.

A local bank-backed analyst says several markets including Japan had been looking to liberalise their gaming industry but timing remained uncertain. He says Genting was not the only gaming operator interested in the Japan market, Las Vegas Sands Corp had also expressed its interest to expand there.

He says proper legislation and the right-sized market were among the factors considered by casino operators. Casino operators will only be attracted to invest if the markets offered an open access to locals and foreigners, excellent location and easy accessibility, and attractive tax rates, he adds.

Genting Singapore's Lee reportedly says the potential liberalisation of Japan and South Korea's gaming industries could be similar to Singapore's decision, which legalised casinos in 2005. The two integrated casino resorts in Singapore have helped boost its tourism industry.

Currently, a group of lawmakers in Japan are pushing for a bill that could legalise casinos in the country. In South Korea, only one of its casinos is open to citizens and it is located in a rural area far from major cities. It has been reported earlier that South Korea was planning for a new casino-resort near Incheon International Airport to attract Chinese and other Asian tourists.

Genting, which was founded in 1965, has been on an expansion mode. It has more than 26 years of experience in operating casinos and integrated resorts in the United States, Asia, Australia and the United Kingdom. The group is the largest casino operator in the United Kingdom, with over 40 venues. Genting entered the UK casino market in 1976.

Indeed, Genting's financial results has shown a lot of improvement after growing its business overseas.

Genting Bhd's net profit for financial year 2011 rose 30.1% to RM2.86bil from RM2.2bil a year earlier on the back of a 28.7% increase in revenue to RM19.55bil.

“We believe that including land cost, an integrated resort-cum-casino project in Japan could cost more than US$8bil,” AmResearch Sdn Bhdanalyst Gan Huey Ling says in a recent report.

She adds that Marina Bay Sands cost an estimated US$5.5bil to develop, while Resorts World Sentosa would cost about US$5.8bil after the Western Zone is completed.

As at end-financial year 2011, Genting Singapore has a gross borrowings of S$3.2bil and cash of S$3.4bil. The group's operating cashflow was S$1.4bil in 2011 while free cash flows were S$118.3mil.

A local analyst believes that the additional debt burden of S$500mil was highly manageable as Resorts World at Sentosa (RWS) itself generates an operating cash flow of more than S$1bil annually.

The analyst is not surprised by the second issuance as the Genting group had previously indicated its appetite for future casino development amounting to some S$5bil in the immediate to medium term.

Citi Investment Research says the newly issued perpetual securities would be accounted for as equity, same as the S$1.8bil issuance that was done in mid-March.

“The annual distribution to the new perpetual security holders is estimated to further reduce profit attributable to common shareholders by about S$36mil (assuming the S$200mil green shoe option is exercised). More importantly, we believe that Genting Singapore cannot pay common shareholders any dividends before they satisfy the distributions payable to the perpetual holders,” it says.

CIMB Research reckons that this second round of issuance, coming hot on the heels of the recent S$1.8bil offering in February, was to satisfy retail demand (the S$1,000 denomination was considerably less than the first offering's S$250,000).

“The purpose of the fund-raising remains the same to gear up for Genting Singapore's business expansion, among others.

“Higher interest costs from the additional S$500mil issuance will lower our financial year ending Dec 31, 2012 (FY12) to financial year 2014 earnings by an estimated 1% to 2%.

“Including this S$500mil, Genting Singapore will have S$2.3bil of fresh funds for opportunistic ventures and acquisitions.”

It says the management of Genting Singapore had indicated, during its fourth quarter 2011 results conference call, that equity commitments to future ventures could be anything from S$500mil to S$400mil.

A third of debt-equity funding would put the size of investment opportunities at S$7bil, says CIMB Research.

Apart from investing in east Asia, analysts say the extra cash in Genting's war chest would be good for the group as it could take advantage of suppressed asset valuations amid current economic jittery in the United States and Europe.

Some analysts are also speculating that Genting may be looking to invest in its second integrated gaming and resort complex in Vietnam.

With a cash pile of more than RM13bil and a fund of S$1.8bil raised earlier, Genting group will continue to be under the watchful eyes of investors as to where the group is going to put its money.